Canada: Industry Canada Blocks Sale Of Allstream Due To National Security Concerns

On October 3, 2013, the Minister of Industry, The Honorable
James Moore (the "Minister") announced that Accelero
Capital Holdings S.a.r.l's ("Accelero") proposed $520
million acquisition of Allstream, a division of Manitoba Telecom
Services Inc. ("MTS"), would not be allowed to proceed
under the national security provisions of the Investment Canada
Act (the "Act").

Background

In May 2013, following a strategic review and an auction
process, MTS agreed to sell Allstream to Accelero for $520 million.
Allstream is a division of MTS that provides telecom services to
businesses across Canada. Accelero is a private-equity firm which
specializes in telecommunications.

According to MTS' press release, in deciding to proceed with
the transaction, MTS was heavily influenced by the fact that
several of Accelero's principals are a "well-known and
experienced group of telecom executives who have previously been
permitted to invest in and operate telecom assets in a number of
countries around the world, including Canada (through Wind
Canada)". MTS was also influenced by the fact that the same
group of principals had previously led an investment of
approximately $1 billion in Canada's telecommunications sectors
and that the transaction was, according to the company, consistent
with recent changes to Canada's policy aimed at increasing
foreign direct investment in the telecom sector.

The parties to the transaction had provided significant binding
undertakings to the Canadian government, including a commitment to
invest $300 million over three years to pursue Allstream's
capital plans. According to MTS, the transaction was of "net
benefit" to Canada and would have, among other things:

sent a strong message that Canada's telecommunications
sector is open to foreign investment;

enabled Allstream to accelerate the introduction of innovative
products to increase the productivity of Canadian businesses;

provided MTS with the capital necessary to increase investment
in Manitoba's telecom infrastructure; and

resulted in $165 million of funding for MTS pension plans
benefitting more than 100,000 plan members.

Investment Canada Act and National Security

Under the Act, the Canadian government automatically reviews
foreign takeovers of businesses with more than C$344 million in
assets. Amendments made in 2009 also permit the Canadian government
to prohibit transactions believed to be "injurious to national
security".

Without disclosing specific reasons for rejecting the
transaction, the Minister noted that "MTS Allstream operates a
national fibre optic network that provides critical
telecommunications services to businesses and governments,
including the Government of Canada".

Canada's rejection of the Allstream/Accelero transaction is
only the third time since 1985 where the Canadian government has
formally blocked a significant foreign takeover. In 2010, the
Canadian government cited the importance of the fertilizer industry
to the national economy to block BHP Billiton Ltd.'s $39
billion bid for Potash Corp. of Saskatchewan Inc. In 2008, the
Canadian government blocked the acquisition of Canadian aerospace
company MacDonald Dettwiler & Associates by Alliant Techsystems
on grounds of national security.

Additionally, while not formally blocked, signals from Ottawa
regarding potential national security concerns prompted Vimpelcom
Ltd. to abandon its efforts to acquire control of wireless provider
Wind Mobile in June of this year. Based on the outcome in the
Allstream and Wind Mobile transactions, it appears that the
Canadian government will closely scrutinize and potentially block
foreign acquisitions of control of Canadian telecom providers
(including both wired and wireless operations) under the national
security provisions of the Act.

The Minister's rejection of the Allstream/Accelero
transaction also clearly affirms that the net-benefit and national
security reviews under the Act are distinct processes that must
both be successfully concluded before a transaction will be allowed
to proceed.

For a copy of the Minister of Industry's statement, please
click here.

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